Gift PrimerA gift occurs when a voluntary transfer for less than full consideration or compensation occurs from a donor to a donee. A valid gift must satisfy the following criteria, to wit:

The donor intends to make the voluntary transfer.

He or she is competent to do so.

The donee is able to receive the gift and has to take delivery.

The donor cedes all control over the property given.

Types of gifts include:

Direct: the donor transfers cash or property directly to the donee.

Indirect: the donor makes a transfer for the donee's benefit. Troy pays his girlfriend's credit card balance, as an example.

Complete: in making a transfer to the donee, the donor gives up all right and dominion over the property.

Incomplete: in making a transfer to the donee, the donor fails to give up all control over the property. If Helmut places money into a revocable trust, then he has made an incomplete gift as he retains the right to control the ultimate disposition of what is in the trust. By contrast, should the trust become irrevocable, then its contents constitute a completed gift.

ReversionaryInterest: gifts that the donor transfers to the donee which revert back to the donor. Their worth to the donee is their present value rather than fair market value. An example would be when a donor places money in a trust for a specific time period for the donee's benefit. At the end of the term, the money or property reverts back to the donor. The value of the gift is less than the value of the property in this instance.

Net Gift: whereas in most instances the donor is responsible for any gift tax, in the case of a net gift, the donee would be.

The Applicable Unified Credit AmountThere is a lifetime of unified gift and estate tax credit amounts which may be used to shelter up to $5.12 million in taxable transfers from the gift tax in 2012. This is the gift tax exemption.

Transfers not Subject to Gift TaxCertain types of gifts are exempt from gift tax.

Qualified Transfers: Payments made directly to a qualified academic institution or medical care provider on behalf of the donee escape any gift tax.

Payments for Support: Legal obligations for children or other dependents may be exempt from gift tax. An example would be payments for higher education and room and board.

Payments Pursuant to a Divorce Settlement: Alimony is not a gift, but rather taxable income to the recipient (payee) and a tax deductible contribution to the payor. Property transfers within a year of a marriage's termination and related to that termination is deemed pursuant to a divorce decree and not a gift.

Transfers to Political Organizations: Exempt, too, from gift tax are gifts made to political organizations. These are broadly defined as those advocating the selection, nomination or appointment of any individual to federal, state or local public office.

Business Transfers: Transfers in a business setting are typically deemed compensation. De minimis gifts such as those to reward years of service or commemorate one's retirement are not subject to the gift tax.

Spousal Gifts: Transfers between husband and wife are exempt from gift tax so long as the donee spouse is a U.S. citizen. Should he or she be a non-citizen, there is a limit on the tax-exempt transfer.

Charitable Gifts: Gift tax charitable deductions are unlimited so long as the recipient is a federal, state or local government for public use, a 501(c)(3) corporation for educational, religious, charitable or scientific purposes; or a 501(c) fraternal or veteran organization.

The Bottom LineOne must file a gift tax return ((IRS Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return)) if one gives gifts that exceed the annual exclusion, are of a future interest or exceed the unified credit amount. When determining whether or not one owes gift tax, one needs to determine what gifts he or she gave for the year, whether or not they are exempt from gift tax or within the annual exclusion amount and to what extent they may be offset by the unified credit amount for the year in question. Above all, one should consult a tax professional when undertaking any tax planning decisions.